This blog discusses the ways that you can save enough money to quit your job and focus on your own dreams.

Wednesday, May 9, 2007

5 reasons to pay with cash

In case you missed this, my husband and I have recently moved to Hawaii. The day after we got to Hawaii, after our honeymoon, I lost my ATM card. Totally stupid mistake—I left it in the machine. And just to double the misfortune, my current bank is a small local bank in NY, with no branches in Hawaii, so there was no way for me to get cash. I ordered a new ATM card and opened a bank account in Hawaii using a personal check, but that money is not available for a week. Thus, we have had to use the credit card to pay for everything for about a week. This has got me to thinking about why it’s so much better to use cash than a credit card or debit card. I used to be like (I think) most Americans, always using my ATM/debit card to pay for even the smallest purchase. It’s just not common to carry a significant amount of cash in America. However, I lived in Japan for three years and it’s changed me. Japan is a cash society. It’s extremely rare to pay by credit card for anything. debit cards just don’t exist (at least from what I know). And you wouldn’t feel at all strange about carrying $500 cash on you, especially at the start of a long weekend (Bank ATMs are closed on holidays). It’s been in Japan that I really got my finances in order and I firmly believe that always have to pay cash for things was one of the biggest reasons. I realize that for big-ticket purchases, it’s probably better to use plastic than carry a huge wad of cash. But how many times have you gone into the grocery store “just to pick up a loaf of bread” and had to pay with your credit or debit card because you “accidentally” also picked up a 2 liter of Coke, a bag of cookies, and the 24 rolls of toilet paper that “just happened to be on sale”? But here’s some food for thought—5 reasons why it’s better to pay cash:1. No Finance Charges. Assuming that you occasionally use a credit card for these small, impulse buys (and that you carry a balance every month), if you decide to only use cash, you’ll be able to avoid these finance charges. Cookies suddenly don’t seem so yummy when you think about having to pay interest on them. And how good of a “sale” is it if you are paying an extra 20% down the line…2. Avoid ATM fees. Before I moved to Japan, I had a horrible habit of taking out money “whenever I needed it” and only taking out the bare minimum. After all, people in America just don’t carry that much cash on them. I would take out maybe $20-40 a day. Unfortunately, the ATM that was convenient to my workplace was not affiliated with my bank, so I was charged $1.50 every time I took that money out. I never realized how much those $1.50 charges were adding up to. In Japan, though, I got into the habit of taking out a lot of money at once and always using my bank’s ATM to avoid the extra fees. Of course, you should always try to use your own bank’s ATM machines. However, if they tend to be inconveniently located, you can save on ATM fees by withdrawing a large sum of money at once rather than smaller amounts throughout the week. 3. Limit your spending. There’s a big psychological difference that goes on when you can actually see the money leaving your wallet. When you use a credit or debit card it’s like using fake money. You don’t see it go away so it doesn’t hurt so much. But after about three times of asking yourself “Wait…didn’t I have $60 in here? What happened to that other $20?” I swear you’ll start being much more conscious about what you’re spending your money on. You might still buy something frivolous, but at least at the end of the day you’ll be able to remember what it was.4. Prevent the dreaded overdraft fee. Does this sound familiar? You’re happily making your everyday purchases and check every day to make sure that your account is in the black when WHAM! Along comes an automatic bill payment that you forgot about, leaving you with a negative balance. You then watch in horror as the previous two days of debit purchases start coming through, with a $20 overdraft fee each time. Booooooo!!!! If you pay in cash then you’ll never have to worry about this happening again.5. Stick to your budget. If you want to save to quit, then you need to be working on a budget. You should set aside a specific amount that you can spend in a week, then take only that amount of money out and carry it with you. Create a mindset where using the credit or debit card is simply not an option. If you cannot afford a purchase with this week’s money, then you’ll have to wait until next week (or next month as the case my be). Using only cash forces you to stick within your budget and you’ll be surprised by how fast you can reach your savings goal.

Anyone else a cash-only person? I’m anxiously await the arrival of my ATM card, although by tomorrow I should be able to take money out of the bank from a teller. No more credit card!!

I am not sure about this. I find it easier to keep track of my finances when I pay by debit card. Plus I have so many point now that I can get a free iPod.I live in New York and find it a very cash-based society. In fact, more restaurants than not only take cash. Perhaps it differs in other parts of the US where there are fewer small businesses.

You know, everything said here could very simply be avoided by good planning and being disciplined.

1) Finance charges -- only applies if you carry a balance. What if you actually used your credit card only if you had the equivalent sum of money on hand? So, you purchase with your card, but immediately pay it back. No finance charges.

2) ATM fees -- well, you already mentioned how to simply avoid these. Withdraw what you think you need and not minimal amts every time; use your own bank's ATMs. Other options include find a bank that rebates other bank's ATM fees.

3) Limit your spending -- again, just about discipline.

4) Overdraft fees -- yet again, discipline. If you keep on top of your finances properly, this should never happen. I suggest using a financial aggregrator -- Yodlee is nice and free.

5) Stick to your budget -- another discipline issue.

Cash just makes it more "real" psychologically... and that's about it. If you put that aside, and decide you want to be serious about keeping track of your finances, and you're disciplined enough to stick to the plans you've made (budget, purchases, etc), then theres no real reason to pay cash.

Keep in mind that MANY credit cards offer some kind of reward, so you're really paying 1-5% MORE for an item when you pay in cash.

Also, money in your hand makes exactly 0% interest. It does not work for you at all. if you keep it in a high-yield account and withdraw only at the point-of-sale, that's potentially a lot of money in interest you'll accummulate.

3, 4 and 5 are all great points ... but I differ with the idea of credit cards being bad for the disciplined user. First, you are using 'someone else's money' for up to 30 days so as long as you pay off the balance, allowing your 'cash' to remain protected in a bank or investment that can pay interest. (over a lifetime this can amount to a few bucks) Second, most of us can find 'good deal' credit cards that exist with no annual fee, cashback (my favorite) or perks for using them up to 6% on some purchases. Third, often purchasing an item with a credit card can protect your purchase from fraud, scams and even offer travel insurance for airfare and rental cars. All in all, a disciplined user of credit cards can work the system to their advantage.

I'll add on more very questionable credit card trick for the extremely disciplined money manager: Many high balance credit cards will run special promo for loan payoffs. For example, Discover card offered a zero percent interest for life, so as long as you make 2 purchases per month and make the proper monthly payment each month. Let's say you pay off a $10,000 surprise medical debt and switch from the installments compounding at 8.5% to a 0% for life credit card. You purchase a cup of coffee twice a month on this card and set up an automatic payment with your checking account. Continue making your normal payments to your own Money Market (perhaps a 5+% return) then pay back the total balance left on your card when you've saved $10,000. With this approach you'll save a significant number of dollars over not using credit cards. This also works for someone just wanting to earn 5+% on a borrowed $10,000 or so that can be put in a money market allowing interest to grow on SOMEONE ELSE'S MONEY. Credit cards in 'good hands' aren't always bad.

Great advice for those who struggle with credit card debt. It's really freeing once you get to a point where YOU USE credit cards instead of them USING YOU. There are rewards for the disciplined. But even the most disciplined make mistakes. Playing with fire, as I've heard it referred...

I have done the cash thing for more than ten years. I am now out of all revolving debt and have a small mortgage.

There have been some studies that show the average purchase is much higher with a credit/debit card (blows the theory of "cash back").

I got a lot of grief when commenting on another blog about this. For some reason people think that it is of the utmost importance to track every cent they spend using a debit/credit card. I get a set amount every week in cash and don't really care where each buck goes.

Susan, I'm curious as to what "studies" show that the avg purchase with a credit card is higher.... What does that mean? For the purchases of the same items, credit card users pay more than cash users? Credit card users purchase more items than cash users? What exactly are you saying?

I find that when I have loose cash in my wallet, I'm more likely to spend it on frivolous purchases (such as Starbucks) than when I keep all the money in the bank. When I use my credit card or debit card, I know I'll have to account for it at the end of the month, but the cash just seems "easy in, easy out." That's just me though.

Thanks for the comments everybody!I certainly see how using credit cards can be a good thing, if used wisely and with discipline.

I should have prefaced this article by saying that the article is for people who are not "good" with their money. These were a lot of the traps that I fell into before I became more disciplined with my money.

Great Idea, but, (always a but!!!), for some this may not be feasible. For instance, if you live, work or travel through a high crime area (unless U R the one committing the crimes!:) )this can be a problem. Additionally, if you travel through an area where police are very proactive, and will pull you over, and or frequently stop and check out who you are this is a real big problem because: many cities, backed by the 1982 drug laws of the fed, allow the police to take large sums of cash, as "ill gotten gain," and require you to prove how you got it. The "rub" is the law does not require them to give it back, even if you prove you got it through legal, and acceptable means. Best thing, in my opinion, is to use a prepay debit card, like a western union, or Rush card, that has a visa or mastercard symbol on it. It is a great way to save by to avoid overdraft and fee charges. One thing to watch out for though, some prepay cards charge you for each transaction, and charges can add up! But it is excellent if you have children you are trying to teach to be fiscally responsible.

I used to pay with cash, but I also want to work on building my credit. So now I pay with one credit card and pay it off every month. The best part is that I also get money for my son's education through the credit card.